Question and Answers

Questions and Answers – Borrowing Against RRSP’s

Published On March 4, 2013 | By Joseph (Ken) | Q&A
Question: A friend asked me if he should take a loan against his RRSP’s, as a way to pay off some credit card debt.  If he’s not physically withdrawing the RRSP’s, isn’t that a good idea?

Answer: RRSP’s are a great way to save long-term for retirement and so most people know not to withdraw funds from their RRSP to resolve short-term financial problems.  There are a number of reasons, including the following: 

1) your withdrawals are considered income and are therefore taxable,
2) you lose the benefit of accelerated growth that comes from it being tax-sheltered, 
3) you lose the contribution room (you can’t re-contribute what you withdrew)

So you might think that borrowing against the RRSP’s is genius since you aren’t drawing down your RRSP’s and, therefore, the consequences above do not apply.Not so fast.  Before you do this, you need to be aware of the potential consequences.  

Revenue Canada’s IT Bulletin 320 cover this subject and it reads as follows:

“Adverse income tax consequences may occur if a plan trust borrows money or uses or permits its property to be used as security for a loan. Subject to certain exceptions, if an RRSP has borrowed money in the year or in a previous year and has not repaid the amount before the beginning of the year, paragraph 146(4)(a) requires that the trust pay income tax on its taxable income for that year. If an RRSP uses or permits its property to be used as security for a loan, subsection 146(10) requires that the fair market value of the property be included in computing the annuitant’s income for the year.

Basically, if you borrow against your RRSP’s and, for whatever reason, you are unable to pay the loan back by the end of the year, you have to take the ENTIRE RRSP investment you borrowed against into income for the year. For example, if you take a $20,000 loan against a $150,000 RRSP, and fail to pay back the loan, you have to report the $150,000’s as income (not the $20,000 you borrowed).

Of course, if you have multiple RRSP plans this may not be a big deal, as you can borrow against a plan that has a value close to the amount of the loan, but if you’ve contributed RRSP’s to the same plan over the years, don’t even consider this idea.

Tell your friend that it’s not a good idea.  If he needs to borrow a small amount of money over a short period, it’s better for him to consider a personal loan or a line of credit. 

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About The Author

Joseph (Ken)
(Ken) is a Registered Public Accountant with over 25 years of public practice experience in the accounting profession. Ken specializes in accounting information systems, taxation and financial reporting.

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